How I Did It: Blockbuster’s Former CEO on Sparring with an Activist Shareholder

The Idea: After losing a proxy fight to the activist investor Carl Icahn, Blockbuster’s then CEO faced a new obstacle: executing strategy in the face of boardroom opposition. He looks back on what he might have done differently.
">

View more from the

Executive Summary

Reprint: R1104A

When Antioco joined Blockbuster, in 1997, outsiders were predicting that the bricks-and-mortar video rental business would be killed off by market shifts and technological advances. But he believed the company could remain relevant.

First he needed to revise Blockbuster’s business model, which was built on buying individual VHS cassettes at a hefty price and then struggling to rent each one about 30 times to make back the money. Antioco’s team persuaded the movie studios to shift to a revenue-sharing system. Then the company jumped into the online business and eliminated its late fees, which had been a major customer irritant. Five years into Antioco’s tenure, Blockbuster’s revenues had nearly doubled.

Enter Carl Icahn, activist shareholder, who had his own ideas about how Blockbuster should be managed and particularly about Antioco’s compensation package. Icahn launched a successful proxy fight and secured seats on the board for himself and two others, putting Antioco on the defensive over his strategies for growth. The situation finally came to a head in a boardroom dispute over his bonus—resolved by his departure six months later. Three years after that, Blockbuster filed for bankruptcy.

Icahn offers his version of events in a sidebar to the article.

When my assistant came into my office in early 2005 and told me that Carl Icahn was on the phone, it was a complete surprise. I knew, of course, that Icahn was an “activist shareholder,” but I had no idea why he might be calling. Icahn told me he’d bought nearly 10 million shares of Blockbuster, where I’d served as CEO for eight years. I didn’t know what kind of play he saw in Blockbuster—and I certainly didn’t expect the new challenges his being our biggest shareholder would bring over the next couple of years.

Long before Carl Icahn arrived on the scene, Blockbuster faced its share of challenges. Indeed, expectations of failure were hovering over the company even before I joined in 1997. Most outsiders were convinced that our bricks-and-mortar video retail business would be killed off by market shifts and technological advances. But I firmly believed we could keep the Blockbuster brand relevant, no matter how people decided to watch movies. Even though Blockbuster nearly doubled revenues to more than $6 billion from the time I joined the company, plenty of people were betting against us.

The atmosphere became even more difficult when a group of dissident directors were put into the board mix. CEOs need to be devising strategy, working with board members, energizing organizations, and dealing with shareholders, but most leaders are ill prepared to handle an activist shareholder who comes at the company with a proxy fight and wins seats on the board. This became readily apparent in 2005. When directors with preconceived notions are determined to serve as obstacles to management’s plans, it’s hard to find a formula for success. Three years after my departure as CEO, Blockbuster declared bankruptcy.

A Career Built on Turnarounds

In a way, it’s ironic that Blockbuster is being featured in a special issue on failure, because I spent most of my career capitalizing on failure by fixing troubled businesses.

After graduating from New York Institute of Technology in 1970, I worked at 7-Eleven. Trainees like me restaffed and restocked failing stores and tried to keep them in business. I was assigned to Long Island—an area where the company had made mistakes in choosing both locations and operators. By the time I was 25, I was a district manager, running 35 stores in Suffolk County. Over time, we transformed the market into one of the company’s most profitable. As a result I was promoted—first to northeast division manager, then to national marketing manager, and finally to senior vice president with worldwide responsibilities. In all, I spent 20 years at 7-Eleven. It was a rapidly expanding business with a lot of growing pains, which created many opportunities.

After leaving 7-Eleven, I spent a very short time as COO for Pearle Vision; then I became CEO of Circle K, a convenience store chain that was in bankruptcy. We took the company private, improved the business, and three years later sold it to Tosco, an oil company, earning our investors a more than quadrupled return on their money.

Next PepsiCo hired me as CEO of its struggling Taco Bell chain. There I learned an important lesson: Just because you’re hired to lead a turnaround doesn’t mean you have to throw out the existing strategy. On my fourth day at Taco Bell, its senior managers presented their business plan. Their analysis made sense. I saw no need to change it simply in order to put my fingerprints on it.

We executed the plan and turned three years of negative comparable store sales into positive growth. With that momentum, PepsiCo (which also owned KFC and Pizza Hut) spun off its restaurant group as Tricon. (Today it’s Yum! Brands.) Around that time Sumner Redstone, the CEO of Viacom, called. He wanted to talk to me about running Blockbuster.

I met with Redstone for five hours in his bungalow at the Beverly Hills Hotel. It was a very good meeting except for one tense moment, when Sumner called the kitchen and personally reprimanded the chef for boiling his hot dog too long. I ended up working for Sumner for six years, and I never had a bad day with him. I found him to be a big-picture visionary and a very supportive leader.

I didn’t believe that technology would threaten Blockbuster as fast as critics thought.

I decided to join Blockbuster for a few reasons: I liked the brand. I saw a lot that could be fixed quickly. And I didn’t believe that technology would threaten the company as fast as critics thought. Blockbuster was by far the biggest video rental company, but its market share was only 25%. To me, that was an opportunity.

A Challenging Model

A lot of what I learned about business came from my father, who was an independent milkman in Brooklyn. He believed that you need to focus on always giving customers what they want while still making money for the company. That’s what I set out to do at Blockbuster.

Blockbuster’s biggest problem stemmed from its business model. Movie studios sold VHS cassettes to rental companies for about $65 apiece, so a store had to rent out each tape about 30 times to make back the money. That’s a big up-front investment for a product that most people want just during the few weeks after it first comes out. The whole industry was hurt by stores’ never having enough copies of new releases.

We asked the movie studios to shift to a revenue-sharing system. We proposed that instead of buying the cassettes for $65 each, we would pay $1 a copy up front but give the studios 40% of rental revenues on their titles. Eventually they agreed. That allowed us to stock many more copies of hot titles and to advertise their availability. We rolled out an ad campaign about guaranteed availability that featured animated Blockbuster boxes singing the classic tune “I’ll Be There.” Comp store sales and market share grew strongly.

Even with this success, people continued to worry that video on demand was going to torpedo the rental business. It’s ironic that we were hurt by a different technology shift: the advent of the DVD. Whereas VHS cassettes were mostly rented, DVDs were introduced by the studios as a retail product, and mass merchants like Walmart and Best Buy priced them below $20. The adoption rate soared.

DVDs also allowed Netflix to take hold, because they could easily be sent through the mail. Previously the video business had been driven by spontaneity: You didn’t have any plans for the evening, so you decided to stay in and rent a movie. We weren’t sure whether a model in which you managed your selections by means of a queue and got a movie in the mail a few days later would catch on. But in August 2004 we jumped into the online business in a big way. A few months later we made a dramatic change by eliminating late fees, which had always been a major customer irritant. Those moves put Blockbuster back into growth mode.

When we began these initiatives, Viacom still owned about 80% of us. We were planning to spend $200 million to launch Blockbuster Online and another $200 million to eliminate late fees. Viacom didn’t think these investments made sense for its own strategy, so it sold its stake in Blockbuster, which became publicly held. Our stock was depressed by the $400 million planned investment—and that set the stage for the proxy fight.

A Fight We Were Doomed to Lose

Icahn got involved with Blockbuster in late 2004, when the company tried to buy Hollywood Video. Our goal was to orchestrate an orderly downsizing of its store-based business and take on its customers as our own while we also focused on developing alternative movie-delivery methods. Icahn bought positions in both companies as an arbitrage play. Ultimately the FTC declined to approve the deal, and another company—Movie Gallery—bought Hollywood Video. After acquiring his interest in Blockbuster, Icahn began giving interviews to the press and writing letters to shareholders (and to me) claiming that we’d botched the acquisition, that we’d spent too much money on our online business, that we shouldn’t have ended late fees, and that the CEO (that would be me) was making too much money. By early 2005 he had decided to launch a proxy fight.

Why Blockbuster Failed by: Carl Icahn

I liked John Antioco personally. He’s not a bad guy. He was a capable executive, but I wasn’t impressed with his work ethic—his heart didn’t seem in it. When I launched the proxy fight at Blockbuster, the feeling that he’d botched the Hollywood Video deal was widespread. The biggest issue was his excessive compensation package. Investors were outraged that he’d get $50 million if there was a change of control. That was the nail in his coffin. I’ve been involved in many proxy fights, but Blockbuster was easy. We won the vote by a huge margin. Antioco was really unpopular among shareholders.

I want to clarify a few things here. It’s not true that I controlled Blockbuster’s board. The two directors I brought in were independent, experts in the media industry, and not “my guys”—they sometimes voted against my position. I’m also not so domineering in the boardroom. During the dispute over Antioco’s 2006 bonus, for instance, I was strongly against giving him the money, but even his friends on the board were irate about it. His departure wasn’t just my wish—the board was not unhappy when he left.

I have a long track record of stepping in as a director and helping clean up companies like Federal-Mogul, Motorola, XO Communications, Philip Services, National Energy, and Yahoo. As a result, I’ve done very well. [Editor’s note: Forbes estimates Icahn’s net worth at $11 billion.] The fact that I can make so much money as an activist investor shows that something’s wrong with governance in most of corporate America. There’s no accountability for CEOs. There are good CEOs and good boards, but too many directors don’t care. Activist investors provide some accountability and can be important catalysts for change.

Blockbuster turned out to be the worst investment I ever made. It failed because of too much debt and changes in the industry. It had too many stores, Netflix created a better business model, and then Redbox kiosks and the whole digital phenomenon eliminated the need for consumers to go to a separate DVD store. Maybe the board did make a mistake in picking Jim Keyes as Antioco’s successor—Keyes knows retailing and did an excellent job with the stores, but he isn’t a digital guy. I also think Antioco did a good job in executing on Blockbuster’s Total Access program, which allowed customers to rent unlimited movies online and in stores. Over time it might have helped Blockbuster fend off Netflix. But Keyes felt the company couldn’t afford to keep losing so much money, so we pulled the plug. To this day I don’t know what would have happened if we’d avoided the big blowup over Antioco’s bonus and he’d continued growing Total Access. Things might have turned out differently.

I was about as prepared for such a fight as I could be without ever having gone through one. You hire a bunch of lawyers and bankers, who give you their points of view. You hire a proxy solicitation firm. You write a letter to shareholders, and the opposing shareholder writes a letter. The reality is, we’d just been spun off from Viacom, and most of our stock was held by hedge funds. They were all in for a quick pop, and Icahn is well-known in that community. We were probably doomed from the start. I’m sure the hedge funds figured that having Icahn’s guys in the boardroom could lead to a deal that would drive up the stock price. At our 2005 shareholder meeting, in a Dallas auditorium, the votes for Icahn’s slate of directors were tallied up. The preliminary results showed that we’d lost. I felt like my guts had been ripped out. It was quite emotional. Most in the audience were Blockbuster employees, and quite a few tears were shed.

I went to the podium and basically said, “The results are the results, but as far as I’m concerned, our strategy is still our strategy. We’re disappointed, but we’ll work with Icahn and his designees to carry out the mission of the company.”

Soon after that I went to New York and met Icahn in person for the first time. We ate at his favorite Italian restaurant, Il Tinello—they even have a dish named after him: Pasta alla “Icahn.” In a social setting Carl is quite engaging. Having dinner with him was actually enjoyable. He has a lot of stories, from past deals to poker games. I came away thinking that maybe we could work this out, and that if Carl or any other directors had any good ideas, they should bring them on.

Carl and his two chosen directors were now on our board of eight. Even though he lacked a majority, sheer force of will gave him a lot of power. Since it could be a formidable task, after a while the other directors were disinclined to pick a fight with him. Then one of the sitting board members retired, and Carl and his directors kept vetoing choices for a replacement. The board settled on someone whom Carl would support for whatever reason. So within a few months he effectively controlled the board.

Carl never physically attended a board meeting at Blockbuster’s corporate headquarters in Dallas—he called in. It’s always hard when someone calls in to a board meeting, and with Carl it’s even more difficult. He likes to make himself heard, and he can go on forever. He’s not shy about interrupting, and he’s not known for boardroom protocol. Frankly, it was a bit of a free-for-all. Eventually, to avoid having to deal with Carl on the phone, I began holding half the board meetings at his New York office. He was winning the power struggle bit by bit.

Having contentious directors was a nightmare; as management, we spent much of our time justifying everything we did. One of them had a bunch of ideas, such as putting greeting cards in the stores, carrying adult movies, and making a deal with Barnes & Noble to add a book section. Mostly, though, they questioned our strategy, which focused on growing an online business and finding new ways to satisfy customers, like getting rid of late fees. We presented data demonstrating that franchisees that had dropped late fees were outperforming those that retained them, but they remained unmoved. They wanted us to reinstate late fees, which would have been a disaster—as apparently it was when they were reinstated after my departure.

In December 2006 the situation finally came to a head over executive compensation. Blockbuster had a very good year, and management was due big bonuses. At the board meeting, when it came time to discuss bonuses, the board went into executive session, meaning I had to leave the room. When I came back in, they had decided that my bonus would be greatly reduced, despite my contract. I said I wouldn’t take it and that I’d see them in arbitration. A few weeks later they cut me a check. I returned it.

Ditching the Existing Strategy

The compensation issue led to a long Friday-night phone discussion between Carl and me. We finally agreed that I’d leave the company in July 2007 and would be paid a negotiated bonus plus an exit package. I felt good. I felt it was time to leave. The board environment had become very frustrating and stressful, but instead of resigning and walking away with nothing, I had cut a deal giving me a major portion of the pay I was entitled to. After that phone call, I celebrated by having a margarita or two with my wife.

Although I was a lame-duck CEO for the next six months, I remained fully engaged, and the business was doing well. I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today, and we’d be rivaling Netflix for the leadership position in the internet downloading business.

For months the directors searched for a new CEO. After my departure they passed over an inside candidate I favored in order to hire Jim Keyes, with whom I’d worked years before at 7-Eleven. I didn’t think he was the best person for the job, but obviously it wasn’t my decision. I followed Blockbuster very closely for a few months after my departure, partly because I still held stock and options. Even though Blockbuster Online was growing incredibly fast and we had successfully slowed Netflix’s momentum, Keyes made it very public that management planned to drastically change the strategy. The company announced a big price increase for online customers, cut way back on marketing, and decided to intensify the focus on the store-based business. Part of that was an ill-fated attempt to take over Circuit City, which went bankrupt soon afterward. All the members of the senior management team I’d worked with left the company. I sold my stock and bought a bunch of Netflix shares, which were then priced around $20. It wasn’t an emotional investment. I could see that Netflix was going to have the whole DVD-by-mail market handed to it, along with a direct path to streaming movies into homes—which is exactly what Netflix has done. I thought I was a genius when I sold my shares at about $35. Today they’re over $200.

I sold my Blockbuster stock and bought a bunch of Netflix shares. It wasn’t an emotional investment.

I believe that Carl lost about $200 million of his original Blockbuster stock investment. I’d have been very happy if he had been able to figure out how to help the company succeed in a difficult environment for many reasons. Carl is very good at what he does—he can make investors rich. But my experiences with him at Blockbuster suggest that his expertise lies in areas other than helping to set a company’s strategy while being a busy activist investor.

In hindsight, there are things that could have been done differently. It was probably a mistake to sell Viacom’s 80% stake all at once—that’s a lot of stock for a market that hasn’t really been following the company. I probably should have met with Carl earlier, before the proxy fight, to lay out what we were doing and why. That might or might not have had an impact on his desire to hold on to the stock. And if I could turn back the clock, I might focus on the online business for a few more years and then drop late fees. Both were the right thing to do, but doing them simultaneously increased costs and made a bitter pill for investors.

I was home watching the morning news on September 23, 2010, when I saw that Blockbuster had filed for bankruptcy. I wasn’t surprised—there’d been speculation that this day was coming—but I was sad and disappointed. I had spent roughly a quarter of my adult life leading that company, so I felt a sense of loss and some anger at the company’s near demise. To be honest, my emotions about Blockbuster are still complicated.

The day the company’s failure will hit me hardest is probably when my own neighborhood store closes.

The day the company’s failure will hit me hardest is probably when my own neighborhood store closes. I went in there recently with my son, who’s now eight. We have a deal where if he behaves well at church, I take him to Blockbuster and let him pick out a movie or a video game. On that visit we rented a couple of Wii games. As I looked around, realizing that this local institution probably wouldn’t be there much longer, I felt an almost overwhelming sadness. My team and I had worked hard to create a future for this company. Unfortunately, turnarounds don’t always stay turned around forever.

A version of this article appeared in the April 2011 issue of Harvard Business Review.

John Antioco was CEO of Blockbuster from 1997 to 2007. Today he invests in retail franchise concepts.